You’ve probably hard that you should save more. And you’re heard that the best way is to “pay yourself first.”
Paying yourself first is actually the easy part. If you have a job with a 401(k) plan, join the plan and set a percentage of your check toward the plan.
Your paycheck will continue to arrive, just with less money in it. You’ve successfully paid yourself first. Now all you have to do is make sure to invest the money, rather than leaving it dormant in cash.
And you need to increase your saving amount over time. You can do this by reviewing the numbers annually, or by dedicating, say, half of any raises to increased saving.
Either way, the goal is to continue to pay yourself first and to get better at it over time.
What’s often not said, however, is what happens when you pay yourself first. The result of lowering your paycheck each week (and keeping less of any raises) is frugality. You spend less.
Frugality is an important characteristic. It’s not something most of us are born with. People who are frugal by nature often learn it from their parents, or from a catastrophic financial problem early in life.
The result is that they don’t spend as much as others and, often, seek to spend less over time. They are savers now and savers later. Very often, they are good investors, too.
The funny thing about paying yourself first is that it enforces frugality whether you are naturally thrifty or not.
If you’re paycheck has $1,000 in it, you are very likely to find a way over the next few weeks to spend $1,000. If it has $2,000, then you will spend $2,000.
By automatically removing money into a retirement plan before you get the check, you will spend the entire check just the same.
But, instead of spending $1,000 you might spend $850. Instead of spending $2,000 you might spend $1,750.
Nothing changes about your habits, but you find ways to accommodate. Frugality sneaks up on you.
Over time, that $150 or $250 a month adds up, then it begins to compound in your investments. The money inevitably creates more money, over decades likely enough for you to retire or, perhaps, work at different goals.
Frugality is the way to financial success. If you don’t have it in you to pinch pennies, then an automated retirement savings plan is the next best thing.